Study pokes holes in flawed Unctad gold exports report

Backlash: An Unctad report alleging underinvoicing of gold exports from SA between 2000 and 2014 is seriously flawed, the writer says. Picture: SUNDAY TIMES

In July, the UN Conference on Trade and Development (Unctad) published a report, Trade Misinvoicing in Primary Commodities in Developing Countries: The cases of Chile, Cote d’Ivoire, Nigeria, SA and Zambia.

In the case of SA, the report focused on silver, platinum group metals, gold and iron ore.

Its findings on gold exports were particularly alarming.

Unctad’s report stated: "Between 2000 and 2014, underinvoicing of gold exports from SA amounted to $78.2bn, or 67% of total gold exports."

It also stated that "the country’s official statistics report very little gold exports, while substantial amounts appear in its leading trading partners’ records. This does not appear to be a simple matter of undervaluation of the quantities of gold exported, but rather a case of pure smuggling of gold out of the country."

The report gave rise to critical articles and comments about the industry. The Chamber of Mines was convinced that the conclusions were incorrect, given the high quality of SA’s auditing systems to which all gold miners are subject; SARS’s comprehensive regulatory regime, not to mention the scrutiny that mining companies’ financial reports face by shareholders, financial analysts, journalists and many others.

As it said at the time, "The chamber disputes the veracity of the data, the assumptions on which the research is based and the conclusions drawn as a result. A cursory review of the dataset referred to indicates significant gaps and errors. The assumption that companies are mispricing rather than that this ‘data’ is simply under-or over-reported is astounding."

As a result, the organisation commissioned an independent inquiry by economic consultants Eunomix. That report is now available in full on the Chamber of Mines website.

Given Unctad’s international standing, the conclusions reached and the impact they would have in the public domain, readers of their report would have been entitled to expect that its findings had been reached through thorough research and the rigorous application of accepted academic standards for this type of work. Unfortunately, this does not seem to have been the case.

The Eunomix probe found a series of serious and basic methodological shortcomings and errors in the Unctad report.

Most fundamentally, Unctad chose to use as its trade data source the UN Comtrade database, which is built using different countries’ inputs. The problem is that the countries use different criteria for the numbers they submit — and especially regarding gold data due to its monetary uses.

The Unctad researchers did not ask themselves any questions about inconsistencies in data received in respect of exports and imports. They merely asserted (and, it seems, the Unctad officials responsible for assessing the research simply accepted) that the inconsistencies are due to deliberate and fraudulent misinvoicing activities by the companies.

Had Unctad bothered to look at other sources — private and official — of trade data, it would have found evidence that would have largely eliminated the basis of the findings, certainly in respect of gold, the area investigated by Eunomix.

Eunomix demonstrates that publicly available data from Statistics SA, SARS and the Chamber of Mines show very similar trends, reciprocally supporting each other and refuting the Unctad findings.

Eunomix does in fact find a "missing" R19bn in gold exports. However, the assumption cannot simply be made that this is due to misinvoicing.

It seems possible this is due to non-South African gold refined by Rand Refinery and "exported", or even assumptions about gold sold at "average prices" versus median or even highest prices, and assumptions about exchange rates.

To be certain, the chamber will be commissioning further research on this (and possibly on other minerals cited in the Unctad report).

As the Eunomix report puts it, the Unctad study makes some very confident assertions but does not attempt to discuss alternative theories around trade misinvoicing, its prevalence, scale or origins.

This leads to the incorrect assumption that the theoretical core of the Unctad report is unchallengeable. However, not only is there not agreement on the central proposition of the report, but trade misinvoicing and its relationship with trade discrepancies are the focus of significant and ongoing debates.

There is no consensus, whether theoretical or empirical, that trade data discrepancies correlate with trade misinvoicing, much less that trade misinvoicing would be the primary cause of such discrepancies. In the same vein, while trade misinvoicing is recognised as being a practice, it may not explain, in whole or in part, trade data discrepancies.

The Unctad study did not seek to provide alternative hypotheses to explain its findings beyond the proposition that trade discrepancy is the product of misinvoicing.

One such obvious hypothesis would have been to question the accuracy of data. But — conveniently — the Unctad study pre-emptively eliminated this hypothesis. This has proven to be a fundamental theoretical and empirical flaw.

The overall implication of the Unctad report is that it claims to prove that South African gold mining companies are committing deliberate fraud either to avoid paying tax on illegal exports or to bypass the country’s foreign exchange regulations. It is implied that SA is therefore missing out on a significant amount of the foreign currency that is earned through gold sales.

These are serious accusations, with significant consequences — legal, financial and social — were they accurate. The Unctad report does not prove the assertion by a long shot.

Chamber members undergo regular, stringent audits in accordance with international accounting standards, and report in compliance with legislation and listing requirements. SA boasts a world-class regulatory and tax enforcement regime and the opportunity for misinvoicing is small.

SARS applies the Organisation for Economic Co-operation and Development (OECD) transfer pricing guidelines for multinational and tax administrations (which South African officials helped develop) and the UN’s practical manual on transfer pricing. SA is acknowledged to be leading implementation of the OECD transfer pricing, base erosion as well as guidelines on profit shifting.

The Eunomix report notes that SA has kept pace with the best international standards since the mid-1990s with respect to its transfer pricing rules. Recent reviews by the Davis Tax Committee reached a similar conclusion.

There have been inconclusive interactions with the researcher and responsible Unctad officials. They have been supplied with a copy of the Eunomix report.

The chamber understands that they plan to publish, in the near future, a revised version of their original report. It is to be hoped that any updated version of the report will correct the misconceptions of the first.